News Release
24 June 2002
INTERNAL AUDIT FOR BANKS
Derick Latibeaudiere
Governor, Bank of Jamaica
24-28 June 2002
It is also my pleasure to extend to the participants from the wider Caribbean region, a very special welcome to Jamaica and to the Bank of Jamaica in particular. To the members of the Jamaican Financial Community we also extend a special welcome.
I must congratulate the Crown Agents for collaborating with us in organizing this course and I would also like to commend the Bank’s Internal Audit Department and the Training Institute for their effort in organizing the course and putting all the pieces together.
Ladies and gentlemen, we are all aware that a well functioning and efficient financial system is vital for achieving robust economic performance. We are also aware that integrity and confidence are the fundamental tenets on which the operations of the financial sector rests. Integrity and confidence are also the basis on which the stability and soundness of the financial system is sustained. Therefore, we as central bankers and members of the financial community, have a serious responsibility to safeguard the integrity of the financial system and to ensure the effectiveness of operations. It seems to me therefore, that the important issue for the sector, is how best to develop the tools and improve the strategies that will enhance the effectiveness and efficiency of the operations.
In this regard, the business of internal auditing is critical to the process of ensuring efficiency and effectiveness in the financial sector. The role of internal auditing is, indeed, an all encompassing one. Internal auditing, by definition provides “independent, objective assurances that are designed to add value and improve an organization’s operations”. Most contemporary definitions also point specifically to the role of internal auditing in providing a systematic, disciplined approach to evaluation and the contribution that this makes to the effectiveness of risk management and control.
In speaking to issues of risk management and internal control, internal auditing directly addresses the fundamental issues of good governance in the banking sector. Internal auditors therefore act as advisors to management by helping to ensure the efficiency and reliability of the internal control procedures and management practices, guaranteeing their soundness and ensuring that risks are understood and properly managed.
Adding value to the organization is a critical component of an internal audit function. No matter what services auditors provide, their main goals, I believe should be to educate, to inform and to leave a stronger, more knowledgeable audit client in the wake of the audit.
RISK
The past decade of consolidation and financial innovation has focused our attention on the issue of risk and has clearly identified the need for organizations to have proper risk management processes in place. Banks, in particular, and organizations in general, have been significantly affected, in a negative way, by deficiencies in their internal audit processes, which have contributed to weaknesses in their control systems. These developments have placed increasing pressure on the internal control systems of financial institutions and corporations alike. The internal auditor, therefore, has a critical role to play in ensuring that weaknesses are eliminated and that exposures to risks are properly identified and managed. These risks include credit and accounting risks, systems risks, information technology risks, information risks, legal risks, market risk and ‘reputational’ risk. It means, therefore, that the internal auditor must ensure a thorough understanding of the nature of transactions by always maintaining a healthy skepticism.
This brings me to the issue of confidence as it affects the auditing process. In recent years, the confidence that once resided in the external auditing process has come into increased question and scrutiny, and the developments surrounding the Enron debacle have only served to severely aggravate that situation. Only recently, new legislation and improvements in corporate governance reforms have been proposed. These proposals will see the rotation of external auditors after four years and the provision of certain non-audit services by external auditors, in addition to more timely disclosure requirements. What this means is that increased reliability will be placed on the ability of the internal auditor to protect the organization by ensuring best possible standards and the contribution of the auditing process to the achievement of credibility and confidence in the financial system. It therefore means greater internal auditing responsibilities to assist with the process of good governance,which brings me to the issue of the auditor’s role in governance.
GOVERNANCE
Whilst governance could be deemed to be the responsibility of top management, the role of internal audit in this process is of utmost importance. Consequently, the internal auditor should see his or her function in terms of a partnership with management in the effort to achieve good governance. There is sometimes a view that the internal auditor and management are on opposite sides and this needs to be corrected. The internal audit activity should contribute to the organization’s governance process by effectively evaluating and improving the process through which values and goals are established and communicated, the accomplishment of goals are monitored, accountability is ensured and values are preserved.
The Institute of Internal Auditors recently issued a position paper on corporate governance and the role of internal auditing which will seek to ensure that all publicly held companies establish and maintain an independent, adequately resourced and competently staffed internal audit function to provide management and the audit committee with ongoing assessments of the organization’s risk management processes and the accompanying systems of internal control.
PROFICIENCY
The contribution that the internal audit function makes to good governance is dependent on the level of proficiency in the area. With the expanding role of auditors, there is a corresponding need to improve and develop new techniques and methodologies to ensure high quality auditing in an economic, efficient and effective way and also in a timely manner.
Internal auditors must possess the knowledge, skills and other competencies needed to perform their individual responsibilities. Consequently, the matter of enhancing the proficiency of the internal auditor through continuing professional development is a matterof priority, which is closely tied to the drive for improving the effectiveness of the financial sector. This, I am sure is what this course is all about - ensuring that you develop and maintain the skills that will allow you to remain on the cutting edge of your profession, while at the same time adding significant value to your individual organizations. Your presence here today acknowledges your commitment to this effort.
I am sure that the course will help to build your professional expertise and enhance your strength as independent proponents of effective management and sound corporate governance procedures.
Ladies and gentlemen, I wish for you all a very successful course.
Thank you.
1